December 12, 2011

The Podium, Boston Globe: Be Prepared for Increased Shareholder Activism

By R. Robert Popeo and William A. Earon

Corporate directors can expect an active proxy season this year.

The combined effects of a sluggish economy, stock price volatility and new regulations stemming from the Dodd-Frank Act are driving an unprecedented level of shareholder activism. JP Morgan recently reported that shareholder activism in companies over $1 billion increased by 90 percent in the first three quarters of 2011. It is thus crucial and urgent for corporate directors to be well-prepared to face potential pressure from dissident shareholders. 

Lower stock ownership requirements for filing shareholder proposals mean that almost any group – from institutional investers to labor unions to religious organizations – can access the proxy to push its own agenda. Activist agendas are rarely aligned with each other, and different groups of activists can have not only conflicting interests but even different definitions of shareholder value.
The result is that shareholder activism can have a variety of impacts – both positive and negative. In some cases, shareholder activists motivate boards to pay greater attention to issues that are important to all shareholders, maximizing equity investment returns, in particular. For example, when dissidents pressure management to increase operational efficiencies or sell off low-performance businesses, activism may lead to sustained growth in a company’s market valuation, although there remains little empirical evidence supporting this statement.

On the negative side, however, it is not uncommon for shareholder activists to be primarily interested in short-term financial gains that may compromise a company’s ability to deliver greater benefits for all stakeholders – including shareholders – over the long term. Another problem is that responding to shareholder activists is typically time consuming and expensive for the board and management with respect not only to direct expenses for outside advisers, but also the opportunity costs that result when corporate leadership is distracted from strategic activities for long periods of time. If the shareholder activism is not anticipated and properly managed, these costs can cause significant harm to the company. 

There are a number of steps that boards can take to manage shareholder activism properly, and many of them revolve around transparency. Companies that consistently practice open, honest communication with their larger shareholders as well as the investment community as a whole are more likely to be fairly valued in the marketplace and less likely to become targets of activists.
A fundamental step is to be proactive about annual proxy communications, ensuring that all proposed candidates for director seats are well-justified and documented. In addition, it is important to have a process to monitor social media communication – both outgoing and incoming.

The power of social media – best illustrated by instances where a small invester’s unsubstantiated comments go viral – are becoming more common and, frequently, more damaging to both corporate reputations and shareholder value. Social media commentary should be continuously and closely scrutinized not only for subject matter but also for tone and author credibility, and responded to when necessary.
When and how should shareholder activism be addressed by the corporation? These questions should be addressed before a company’s first encounter with dissidents. Reach out and listen to major shareholders. Pay attention to social media. In advance, identify spokespersons and determine how corporate responses will be crafted. Anticipate issues that have the potential to encourage activists and work on these issues proactively. Watch for changes in stockholder composition, and consider what these changes could mean.
Increased shareholder activism is the new reality; being prepared for it is fundamental to good corporate governance.

R. Robert Popeo is president-elect of the New England chapter of the National Association of Corporate Directors and chairman of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. William A. Earon is the Association's current president and founder and managing director of Coastal Capital Advisors, LLC.